US Unending Inflation and War... Market Expects 'One Rate Cut This Year'

US January CPI Rise Records 3%, Higher Than Expected 2.9%

Housing Costs and Eggs Lead Inflation

Lodging Fees and Used Car Prices Also Rise Due to Western Wildfires

Fed Expected to Cut Rates Only Once This Year

The US Consumer Price Index (CPI) rose to the 3% range year-over-year for the first time since June last year. While previously the Federal Reserve (Fed) was expected to cut rates twice this year by 0.25 percentage points each, forecasts now suggest only one cut following this CPI result.

The US Labor Department announced on February 12 (local time) that the January Consumer Price Index (CPI) rose 3.0% compared to the same month last year. Month-over-month, it increased by 0.5%. Dow Jones had forecast a 0.3% monthly increase and a 2.9% year-over-year rise.

Exceeding Market Expectations

Core CPI, excluding volatile energy and food prices, rose 3.3% year-over-year and 0.4% month-over-month. These figures also exceeded market expectations of 3.1% and 0.3%.

Housing maintenance costs were the biggest factor driving January inflation. US housing prices rose 0.4% month-over-month, accounting for about 30% of the total increase. Owners' Equivalent Rent (OER) showed a particularly significant rise. OER represents the estimated rent that homeowners would receive if they were to rent out their homes. While homeowners don't actually pay rent, it measures potential rental income. It's a kind of 'virtual rent.' Since many homes in the US are owner-occupied, the OER concept is used to reflect this in the CPI. OER rose 0.3% month-over-month and jumped 4.6% annually.

Eric Norland, Senior Economist at CME Group, told CNBC, "Housing costs are acting as a major driver of inflation as Americans unable to buy homes due to high mortgage rates flood the rental market," adding, "Traders (of stocks and bonds) seem to think the likelihood of additional Fed rate cuts has decreased."

Egg Prices Drive Food Costs Higher

Food prices rose 0.4% month-over-month. The main cause was soaring egg prices due to the culling of millions of chickens following bird flu outbreaks in the US. Egg prices surged 15.2% month-over-month and 53% year-over-year. The Bureau of Labor Statistics noted this was the largest increase in egg prices since June 2015, accounting for about two-thirds of the rise in household food prices.

The Los Angeles (LA) wildfires in California, expected to cause the largest damage in US history, also stimulated inflation. Hotel occupancy demand surged as residents sought temporary accommodation in affected areas. Vehicle purchase demand also increased as many cars were destroyed or damaged by the fires. While new car prices remained unchanged, used cars and trucks rose 2.2%. Auto insurance increased 2%, recording an annual increase of 11.8%.

Additionally, some companies raised product prices in anticipation of additional tariffs to be implemented throughout the year.

Maybe Just One Rate Cut This Year

With US January inflation coming in higher than expected, Wall Street is leaning toward the Fed making just one rate cut this year, down from the two cuts projected in last year's Summary of Economic Projections (SEP).

According to CME FedWatch, interest rate futures markets reflect an 86.8% probability that the Fed will maintain the current benchmark rate of 4.25-4.50% at the May Federal Open Market Committee (FOMC) regular meeting. The markets continue to favor maintaining rates, with September showing equal probabilities of about 41% for either a 0.25 percentage point cut or maintaining rates.

Consequently, the US 10-year Treasury yield jumped 10bp (bp=0.01 percentage point) to 4.63%, the highest level since January 12. The US 2-year Treasury yield, sensitive to monetary policy, also rose 7.50bp to 4.36%.

Chicago Federal Reserve President Austin Goolsby said about the January consumer price data, "It's eye-opening," adding, "If results at this level continue for several months, there would be no doubt that the Fed's mission is not yet complete."

New York=Park Sin-young Correspondent nyusos@hankyung.com